Untitled Flashcards Set

Bond

A long-term debt instrument where a borrower makes payments of principal and interest to the bondholders.

Par Value

The face amount of the bond, which is paid at maturity; commonly assumed as $1,000.

Coupon Interest Rate

The stated interest rate paid by the issuer, typically fixed; helps determine dollar payment of interest.

Maturity Date

The date when the bond must be repaid.

Yield to Maturity (YTM)

The rate of return earned on a bond held until maturity.

Call Provision

A provision that allows the issuer to refund the bond issue if rates decline, often leading to higher yields for investors.

Sinking Fund

A provision to pay off a loan over its life rather than all at maturity, reducing risk to investors.

Premium Bond

A bond that sells for more than its par value due to having a higher coupon rate than the YTM.

Discount Bond

A bond that sells for less than its par value because its coupon rate is lower than the YTM.

Convertible Bond

A bond that may be exchanged for common stock of the firm at the holder's option.

Warrant

A long-term option to buy a stated number of shares of common stock at a specified price.

Puttable Bond

A bond that allows the holder to sell the bond back to the company prior to its maturity.

Current Yield

The annual coupon payment divided by the current market price of the bond.

Capital Gains Yield (CGY)

The expected change in the bond's price divided by the beginning price.

Interest Rate Risk (Price Risk)

The risk that rising required rates of return will cause the value of a bond to fall.

Reinvestment Risk

The risk that received coupons or principal will need to be reinvested at lower interest rates, reducing overall return.